The Philippine economy grew just 2.3% in the second quarter of 2026, its weakest performance in nearly 16 years outside the pandemic, as a sharp pullback in public construction and elevated prices weighed on activity, the Philippine Statistics Authority (PSA) reported on Friday, August 7. A day later, the Bureau of the Treasury (BTr) reported that the slowdown had helped push the national government's debt-to-GDP ratio to 66% as of end-June — its highest level in 22 years.
The 2.3% print was down from 2.8% in the first quarter and 5.4% a year earlier, bringing first-half growth to 2.6% — well short of the Marcos administration's already-downgraded full-year target of 3.5% to 4.5%, according to the PSA and reporting by Rappler and The Philippine Star. Excluding the pandemic-era contraction, it was the slowest quarterly growth since the fourth quarter of 2009.
Flood-control scandal fallout named as a direct drag
Economy, Planning, and Development Secretary Arsenio Balisacan told reporters that general government construction plunged 32.4% year-on-year, the single biggest drag on growth, and tied the contraction directly to the fallout from 2025's flood-control corruption scandal. "Although public construction is a small part of the economy, the amount of that contraction, 32%, brought a significant impact on the economy," Balisacan said, according to Rappler.
Balisacan said the economy could have grown at least one percentage point faster had public construction simply posted zero growth instead of contracting, and attributed the collapse to officials' reluctance to approve or take responsibility for infrastructure projects amid heightened scrutiny following the scandal. He expressed optimism the trend would reverse: the Department of Budget and Management began releasing mobilization funds for 2026 infrastructure projects to the Department of Public Works and Highways in late June, with DPWH awarding contracts in June and July, and government officials expect construction spending to pick up in the third quarter.
Gross capital formation — a broad measure of investment — contracted 9.2% overall, with its largest component, fixed capital formation, falling 13.7%, its worst non-pandemic showing since 2011. Household consumption, the economy's traditional main driver, grew just 2.8%, its weakest non-pandemic pace since 2010, as Balisacan cited high inflation, job losses, and weaker remittances linked to the Middle East conflict.
There were bright spots: agricultural output grew 2.7%, goods exports surged 17%, and exports of consumer electronics and semiconductors — tied to global demand for AI-related components — jumped 230.3% and 13.4% respectively.
Debt ratio climbs as growth slows
The next day, BTr data showed the national government's debt-to-GDP ratio rose to 66% at end-June from 65.2% at end-March — the highest share since 71.6% in late 2004 — as outstanding debt hit a record ₱19.07 trillion, up 2.8% from ₱18.55 trillion a month earlier and already surpassing the government's own ₱19.06-trillion year-end projection, according to The Philippine Star.
UnionBank chief economist Ruben Carlo Asuncion said the ratio "warrants close monitoring" but "remains manageable" if growth recovers and fiscal consolidation stays on track. "The increase reflects not only the government's financing requirements but also the slower pace of economic growth," Asuncion said, adding that the weak GDP print "mechanically" raised the debt ratio because slower growth shrinks the denominator against which debt is measured.
Jonathan Ravelas, senior adviser at Reyes Tacandong & Co., framed the trend more starkly: "Without a credible plan to expand revenues, improve spending efficiency and accelerate private sector investment, the burden of today's debt will increasingly be passed on to future generations." Domestic debt still accounts for the majority of the stock, at ₱12.84 trillion, versus ₱6.23 trillion in external debt.
The administration's own Philippine Development Plan, updated in May, had targeted a debt-to-GDP ratio of 60% to 63% for this year — a target the June figure has already exceeded with two quarters remaining.
What officials say happens next
Palace press officer Claire Castro called the slowdown the result of "unusual events" and said it was "only temporary." Balisacan said reaching even the lower end of the government's 3.5%-to-4.5% growth target now requires the economy to expand at least 4.4% in the second half — a pace he called "demanding" but achievable "if we act with urgency, discipline and close coordination across government." He rejected suggestions the Philippines was heading toward stagflation.
The weak growth data also softened expectations that the Bangko Sentral ng Pilipinas would raise interest rates further at its August 27 policy meeting, after two 25-basis-point hikes this year brought the benchmark rate to 4.75%. Ateneo Center for Economic Research director Ser Percival Peña-Reyes said the data "substantially reduces the likelihood" of another hike, while Chinabank Research forecast at most one more 25-basis-point increase.
Context
The link between the flood-control scandal and slower growth was flagged earlier by the World Bank, which in its midyear economic update warned that investor confidence and infrastructure investment were both being dampened by the corruption cleanup, and cut its 2026 Philippine growth forecast to 3.7%. The scandal, which surfaced in 2025, implicated thousands of flood-control projects worth a combined ₱545 billion since 2022 as substandard, undocumented, or nonexistent, and has since triggered stricter DPWH validation requirements that officials now cite as a factor slowing disbursement — the same requirements Balisacan says are also responsible for the second-quarter construction contraction.
Sources
- Philippine economy slows to 2.3% in Q2 2026, weakest since 2009 — Rappler
- GDP slows to 2.3 percent, weakest in 5 years — Philippine Star
- Debt-to-GDP ratio hits 22-year high in June — Philippine Star